Predators likely to circle as junior miners struggle for funds

The potential for a spike in corporate activity among junior miners has been highlighted by a new survey that shows two out of three companies in the sector operate with less than $5 million in the bank and are worried about raising capital.

Grant Thornton’s third annual JUMEX survey, which focuses on mining and exploration companies with a market capitalisation of less than $500 million, finds that the availability of equity funding is the biggest issue for respondents.

The survey shows that 35 per cent of companies in the sector hold less than $2 million in cash, while a further 29 per cent hold between $2 million and $5 million. These companies are likely to need a capital injection within 12 months, but cannot be certain of investor demand because of global economic volatility.

“If conditions do not improve, increased levels of corporate activity such as takeovers are likely, as companies with funding take advantage of the weakened positions and reduced valuations of those that don’t [have funding]," Grant Thornton corporate finance partner Holly Stiles said.

Consistent with previous years, companies that intend to raise funds are leaning towards private placements and rights issues as preferred options.

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But Grant Thornton’s survey reports an increase in those companies considering alternative funding mechanisms such as joint ventures or asset sales.

“It is better to have a smaller share of a funded project than 100 per cent and lose the project due to lack of funds," said an anonymous respondent to the survey.

Junior miners are expected to benefit from the Australian Securities Exchange’s move to allow companies outside the S&P/ASX 300 and with market capitalisation of less than $300 million to raise funds to the value of 25 per cent of their issued capital without shareholder approval.

The new rule came into effect on August 1, replacing the previous cap of 15 per cent.

However, instead of seeking approval at the time of the raising, which used to be the case, companies must now put it to shareholders at their annual meeting each year – meaning few have tested the theory that this will make raising capital more efficient.

The second biggest issue facing junior miners, the survey finds, is the proliferation of red tape in Australia.

In some cases, this factor has led respondents to abandon the country.

“We left exploration in Australia and found Africa to be mineral-rich, underdeveloped, less costly, attractive to other investors and for us, [and] there is minimal sovereign risk in Cameroon," said iron-ore explorer
Legend Mining
’s managing director,
Mark Wilson
.

Grant Thornton reports that there are 757 mining and exploration companies with market capitalisation of less than $500 million on the ASX, a figure that represents 36 per cent of all listed companies.